The price of failure

IS THERE a graveyard for failed South African entrepreneurs?

This was the thought that occurred to me as I drove through Randburg on Wednesday morning, checking out all the closed shops, boarded up and adorned with To let signs on the outside.

I wondered who would have the inclination to back these entrepreneurs again and whether they would have the guts to give it another go after being squeezed out by the recession - particularly if they went down owing lots of money to creditors.

I put this question to leading South African IT entrepreneur Vinny Lingham, who has long said that South African funding institutions need to change their attitude towards failed entrepreneurs.

"In my experience, the biggest problem facing South African SME [small- and medium-sized enterprises] entrepreneurs is that they are required to give personal sureties to receive any type of bank finance," said Lingham.

He pointed out that this ultimately links a business failure with personal sequestration and subsequent erosion of wealth, as entrepreneurs lose their houses or savings and as a result cannot raise future finance for a new business.

The lack of capital will kill any attempts at developing a sustainable entrepreneurial culture in South Africa.

High-cost risk

Lingham fumes that the system of entrepreneur finance is broken and that personal sureties should be "outlawed" if South Africa is serious about stimulating its small business sector.

Personally, I think more work needs to be done in terms of giving support to entrepreneurs with hands-on management assistance before we get to the US financing model - which Vinny himself has experienced - but I think he makes a valid point. If our investors know that their business failure will cost them their personal wealth, it's tough to get enthusiastic about taking the risk.

I turned it around and put the same question to Brett Commaille, who heads up venture capital firm Invenfin.

He agrees that while entrepreneurs should not be written off after a failure, it is often the nature of the failure which can decide how you are likely to be viewed in the future.

Conduct is crucial

"If you fail and leave several people hanging, possibly taking others with you, the market will have a dim view of you. The way you conduct yourself in a failure plays a role in how potential partners will view you in the future."

He also points out that banks and funding organisations have a primary responsibility to look after the money they are entrusted to manage, and that as a result of the financial crisis they are more circumspect about lending risks.

Commaille also cautions that first-round funders - typically friends and family - may be forgiving of a failure but warns: "If you leave a bank in the lurch, your name will be remembered and spoken of at credit committee meetings with disdain. You will not get money from them again."

Lingham concluded: "Entrepreneurs that have failed at least once are far more likely to build a successful business than first-time entrepreneurs. However, our system does not encourage failure; it punishes it.

"Until we change that mindset, when a business shuts down the owner is always going to be looking for a job - and that's not what SA needs right now!"

My conclusion: the recession has taken its toll on entrepreneurs and I suspect the banks themselves have lost many small business clients in the carnage. My hope is that the financiers also think with their entrepreneurial hats on to see if they can back the next big winners.

- Fin24.com